Related Parties

Question 1

What is a related party?

Answer 1

A person or entity that is related to the entity preparing its financial statements

Question 2

A person, or member of their close family, is related to the reporting entity if they;

Answer 2

-have control or joint control over the entity (more than 50%)
-have significant influence over the entity (20-50%)
-are a member of key management personnel of the entity or its parent (Directors)

Question 3

Two entities are related if;

Answer 3

-they are parents and subsidiaries within the same group
-one entity is an associate or joint venture of the other
-a person (or a member of their close family) who is related party of one of the entities has control over the other
-a person who has control over one of the entities also has a significant influence over the other entity or is a member of its (or its parents) key management personnel

Question 4

How do you account for related party transactions?

Answer 4

All transactions between related parties must be disclosed in the financial statements as well as any outstanding balances

Question 5

Why do we need to disclose related party transactions?

Answer 5

Without disclose shareholders and lenders would be unaware of these transactions (related party could show improved margins as a result of being sold good at discounted price)